Broadcom soars 14% in premarket lifting Wall Street higher amid strong AI demand 📈

Shares of one of the largest U.S. chipmakers Broadcom (AVGO.US) rose nearly 15% yesterday, after the session closed, and today are maintaining the upward momentum in trading ahead of the U.S. market opening. The company reported results, pointed to higher demand in the AI chip segment and announced a 10:1 stock split, with the company partnering with Alphabet (Google), among others. The company will also pay a 'symbolic' dividend of $5.25 per share.

• The company has a nearly 4.6% weighting in the Nasdaq100 index, so such a large increase has helped improve sentiment across the benchmark. Today, we're also seeing mostly better sentiment among other semiconductor manufacturers, after comments and higher forecasts from the company improved sentiment in the broader sector 
• The company's revenue rose 43% year-on-year, with demand for its AI chips responsible for the accelerated growth, according to Broadcom. This has opened the way for the market to speculate on how much of the market Broadcom will ultimately 'grab' and how quickly it will be able to grow revenues and profits, thanks to the high demand in the AI industry, which still cannot be met by a sufficiently high supply.

Broadcom results and forecasts (Q2 fiscal 2024, ending May 31, 2024)

• Revenue: $12.49 billion vs. $12.03 billion expected (company estimates $3.1 billion covered by AI product sales)
• Earnings per share (adjusted EPS): $10.96 vs. $10.84 expected
• Broadcom reported $2.12 billion in net income during the quarter, or $4.42 per share, versus $3.48 billion in net income, or $8.15 per share, in the year-ago period.
• Net income: $2.12 billion vs. $3.48 billion in the year-ago quarter ($4.42 unadjusted EPS vs. $8.15 a year earlier)

Expected revenue for the full fiscal year: $51 billion vs. $50 billion expected in the previous quarter and $50.42 billion market forecasts

AI business catalysts?

• The company indicated that last year's acquisition of software company VMware contributed to the jump in sales. Without VMWare's impact, Broadcom's revenue growth would have been not 43%, but 12% y/y. Broadcom CEO Hock Tan conveyed that the company is watching and responding to AI demand primarily from large, enterprise customers, which it will help scale AI capabilities for in the coming quarters.
• The company's shares will be split on July 15. Recently, a similar move was decided by Nvidia (NVDA.US), with which Broadcom is likely to compete in the AI solutions market. 
• It's worth remembering that the market now seems so large, however, that advanced effects in the form of margin compression or price battles among AI GPU manufacturers are unlikely to be seen yet.
• It's worth noting that, aside from the mention of AI product sales, net income performed decidedly weaker y/y, and the company's full-year revenue forecast of $51 billion (albeit raised) implies sales similar to those achieved this quarter and a rather flat k/k trend in the next 2 quarters of the year (still implying about 40% y/y growth against $38 billion in revenue, achieved in fiscal 2023).
• In Q2 of fiscal 2023, the share of AI-related product sales in Broadcom's revenue was about 25% ($3.1 billion vs. $12.49 billion). Investors will be watching closely to see if this percentage changes dynamically, in the coming quarters.

Broadcom shares (AVGO.US), D1 interval

Source: xStation5